The Breakdown - Fed Governor Waller Says Crypto Adoption Is Nothing to Fear

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Thursday, August 21st. And today, the regulatory discourse around crypto adoption continues. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link of the show notes or go to bit.ly slash breakdown pod. Well, friends, Wyoming Blockchain Summit just continues to be an interesting spot to see the changing discourse around crypto. Fed Governor Christopher Waller kicked off day two by

Starting point is 00:00:48 telling policymakers and bankers that they have nothing to fear from crypto adoption. During a keynote speech on Wednesday, Waller said, there is nothing scary about this just because it occurs in the decentralized finance or defy world. This is simply new technology to transfer objects and record transactions. There's nothing to be afraid of when thinking about using smart contracts, tokenization, or distributed ledgers in everyday transactions. Waller argued that there's absolutely nothing new about leveraging new tech to improve the financial system. He compared the existing system to the evolving defy system, giving the example of buying an Apple, tapping your debit card to pay with digital dollars in a checking account and getting a receipt as a record of the transaction.

Starting point is 00:01:26 Waller continued, the same process applies to the crypto world. I buy a meme coin and use a stablecoin as the means of payment. The transaction takes place using a smart contract. Finally, the transaction is recorded on a distributed ledger. There was also an entire section of Waller speaking to stable coins and the need to foster adoption. Now, this is nothing new by itself, as Waller came out as strongly pro-stable coin in February and really led the charge on the issue within the Fed. The interesting part was that Waller emphasized that stablecoin markets have matured to the point where they can be considered reliable infrastructure, a point that many policymakers fail to recognize. The stablecoin landscape simply isn't the same as it was in 2021. We don't have

Starting point is 00:02:02 algorithmic stable coins like Luna constantly threatening to blow up, liquidity, reserve, practices and operational sophistication has reached the point where we haven't had a major depegging incident in years. And while the Silicon Valley Bank incident with Circle might still be fresh in some people's minds, that happened more than two years ago. It also prompted Circle to completely change the structure of their reserve to ensure 24-7 liquidity and minimize counterparty risk. Summing up, Waller commented, the technologies available today might be new, but leveraging innovative technology to build new payment services is not a new story. What I'd like to emphasize today is that the private and public sectors can both embrace innovation within their respective roles.

Starting point is 00:02:38 The main thrust of Waller's speech was that the private sector has been the driving force of crypto innovation, but it's time for the public sector to take an active role. He went beyond just discussing the need for clear regulation, stating, it's important for the Federal Reserve to continue to embrace technological advancements, to modernize its services, and continue to support private sector innovation. Waller said the Fed is conducting technical research on the latest wave of innovations, including tokenization, smart contracts, and AI in payments. He added that it's important that the central bank understands the latest developments to better understand whether, quote, emerging technologies could provide opportunities to improve our existing platforms

Starting point is 00:03:10 and services. Essentially, there was a recognition that the Fed's tech stack hasn't significantly evolved in decades, and that needs to be a major focus moving forward. Waller didn't want to crowd out public sector innovation, but argued that it's important that the Fed's payment rails are compatible with the crypto ecosystem. Now, on yesterday's show, we talked about how much of a sea change it was to have Fed Governor Bowman, appearing at the conference and engaging with the industry on permissive regulation. Waller's attendance took that theme to an entirely different level. Leaving aside that we just heard a Fed governor talking about trading meme coins on a decks as if it were the most normal thing in the world, Waller is an important figure at the Fed. There's no such thing as an unimportant

Starting point is 00:03:45 Fed governor, but Waller is one of four candidates believed to be in line for the chair once Powell's term ends in May. Even if he doesn't get the position, Waller will be well placed to support a reform agenda at the Fed from his current role as governor for payments. Following the speech, it's now clear that Waller isn't just in favor of permissive crypto policy, he wants to actually embed crypto technology into the Fed's financial rails. He clearly understands the stakes. During a Q&A session after the speech, he quipped, you can't stop it because you're afraid to try it or make a mistake because then you just become Europe. Custodia Bank CEO, Caitlin Long posted, Pinch me again. A Fed governor just said, there's nothing scary about this when referring to

Starting point is 00:04:21 distributed letters and smart contracts and payments. Nature is healing. Blogchain entrepreneur, Sergei Garasimovich tweeted, The signal is super strong that crypto got the attention to the Federal Reserve not only from a risk perspective, but as a technology that can optimize their money movement technology across the financial system. Now, Waller's speech came a few hours ahead of the release of the Fed Minutes from the July meeting, which discussed Stablecoins for the first time.

Starting point is 00:04:43 I won't read the full paragraph, but Stable Coins were mentioned eight times. It was clear there was a lengthy discussion about the opportunities and risks of stablecoin adoption. The Minute said the participants, quote, remarked that payment stablecoins could help improve the efficiency of the payment system. They also observed that such stablecoins could increase the demand for the assets needed to back them, including Treasury securities. Nate Grassee, the president of Nova Diaz Wealth, remarked on how quickly things are moving, tweeting, latest FOMC Minute showed Fed discussed stablecoins

Starting point is 00:05:09 during July meeting. That's right, stablecoins. Now, following Waller's speech, Senator Cynthia Lummus took the stage to lay out her time frame for moving market structure legislation forward. She said, we will have market structure to the president's desk before the end of the year. I hope it's before Thanksgiving. So we will have market structure done this year. Now, currently there are two competing versions of the market structure bill. The Senate version introduced and sponsored by Lumas earlier this year, and the Clarity Act, which has already been through years of negotiations, and was passed by a full House vote in July. The bills offer fundamentally different approaches to dealing with the core issue of the

Starting point is 00:05:41 securities definition for crypto tokens. For that reason, they're not readily able to be combined and a choice will need to be made at some point. Interestingly, Lummas suggested that she's quite open to some of the ideas in the House bill, stating, We want to honor as much of the House's work as we can on Clarity because they had a robust bipartisan vote. And we don't want to disrupt that very much. So we think we'll use the Clarity Act as the base bill. We're sort of just subsuming the House bill. Clarity will probably end up being what passes, but clarity as tweaked by the Senate. She specifically referred to the Senate's approach to Crypto Securities as unlikely to end up in the final bill.

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Starting point is 00:07:00 the future. Reflecting on how the year in crypto legislation has gone, Lemmas commented on the expectation that Stablecoin legislation would breeze through, stating, we thought that would be a lighter lift, then we could do market structure later. What we found out was that it was not a light lift. While negotiating with Democrats, Lemmas said, we spent days in win. endless rooms going through the changes they wanted, but we finally were able to achieve enough small revisions to get a really solid vote. According to Lumas, the House wanted some further changes to the Genius Act, but the President forced the bill to his desk. Therefore, some of the House changes to Genius ended up in the Clarity Act. Putting some more details on the timeline for

Starting point is 00:07:34 market structure, Lumas hopes to get the bill out of the banking committee by the end of September. The Agriculture Committee will then move their half of the bill dealing with the CFTC and crypto commodities throughout October. Now, that is a tight time frame, but feasible if everything goes to plan. At a later stage, though, Lummus noted that the Senate is a procedural mess, so maybe that timeline is a little optimistic. But the approach of taking the House bill as the base is a deliberate strategy to get things moving more quickly. Earlier this year, Lummus referred to the Genius Act as like giving birth to a porcupine, and this interview really gave an insight into the finer points of porcupine birth in Washington. Another interesting panel at the event dealt with the urgency of

Starting point is 00:08:09 getting the regulations right. This has been a common refrain from the crypto industry, but it's getting all the more clear as the year drags on. The U.S. experience a brief honeymoon period after the Trump inauguration with crypto startups returning to the U.S. But they're not going to stick around unless the government finalizes clear and frankly permissive regulations. Sylvia Favretto, the General Counsel at Mistin Lab said, I don't think it's too late even with the mecca regulations in the EU. However, in her view, the window of opportunity is small and she urged immediate action from policymakers. Stuart Alderati, the chief legal officer at Ripple concurred, adding, if we seize on the opportunity now and get the market structure right,

Starting point is 00:08:43 I think we win. If we don't get the market structure right and the switch flip back to a more hostile policy or regulatory environment, I think there is a very credible risk that we will lose out to the EU, to APAC, or maybe even to the Middle East. One of the reasons that time is of the essence is that there really isn't a lot of legislative time left in this administration. It can't be taken for granted that Republicans will control Congress after next year's midterm. In fact, it would be a historic if they held on to their majorities. Passing any meaningful legislation is difficult at the best of times and nearly impossible in a year with midterm elections. That issue is amplified for crypto policy, which has become an extremely polarizing force in watching.

Starting point is 00:09:16 Washington. Democrats already seem reluctant to vote for crypto bills given Trump's connections to the industry, and that's going to be an even bigger ask next year. So realistically, this is the year that legislation needs to move, or there's a strong possibility that we won't get any further laws on the books for several years. That's one of the reasons this conference is so noteworthy. We've heard from policymakers across multiple branches of government, and every single one of them articulated a clear vision of what they want to achieve over the next year and how they're going to go about doing it. There are still a lot of roadblocks and nothing in Washington is a given, but there also seems to be a lot of momentum and intent behind the agenda.

Starting point is 00:09:49 And if you want to understand why this is a fight worth having, just from the U.S.'s opportunistic perspective, a new report from Goldman Sachs said that the stablecoin market could reach trillions. In a research paper published on Wednesday, analysts wrote, payments are the most obvious source of total addressable market expansion for stable coins over the longer term. This opportunity is largely untapped so far with the majority of stablecoin activity being driven by crypto trading activity and demand for dollar exposure outside of the U.S. They continued, stablecoins are a $271 billion global market. And we believe USDC benefits from market share gains on and off of partner Binance's platform as ongoing stablecoin legislation

Starting point is 00:10:24 legitimizes the ecosystem and the crypto ecosystem expands also potentially catalyzed by legislation. Based on current trends and announced initiatives, we see 77 billion of growth in USC, or a 40% compound annual growth rate, from 2024 to 2027. Now, the inclusion of finance instead of Coinbase was straight from the note and could suggest Goldman Sachs analysts haven't quite got their head around the market. The logic behind the trillions in market size was a little squarely as well. The analyst wrote, Visa sizes the addressable market for payments at around 240 trillion in annual payment volume, with consumer payments representing around 40 trillion of annual spending. B-to-B payments comprise roughly 60 billion, while person-to-person payments and disbursements

Starting point is 00:11:02 comprise the remainder. Now, it's not clear that payment volume is going to be correlated with stable coin market cap, but the underlying point is that there is a gigantic market for payments, that stablecoins can attack. And whatever quibbles we might have with the specific numbers, the big takeaway is that Wall Street has stable coins on the brain. In calls with clients on Wednesday, UBSs, as Paul Donovan said, U.S. Treasury Secretary Besson is reportedly getting excited that stable coins might increase demand for short-dated U.S. treasuries, helping finance the unsustainable U.S. fiscal position. However, stable coins are more about redistributing money supply. Someone selling treasury bills to buy stable coins, which invests the money in treasury

Starting point is 00:11:36 bills, does not change demand for U.S. debt instruments. Again, whether that analysis is right or wrong broadly doesn't matter that much. It's simply evidence that stable coin analysis is a hot commodity across Wall Street right now. So friends, that's the story from here. Continues to be a week with less news and more analysis, but a good way to get a sense of the positioning heading into the fall. Obviously, the big story will be what Powell says in his speech on Friday, but for that we will have to come back next week. That's going to do it for today's breakdown. Appreciate you listening, as always, and until next time, be safe and take care of each other. Peace.

The Breakdown - Fed Governor Waller Says Crypto Adoption Is Nothing to Fear

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